margin of safety

We had written about Piramal Enterprises before here recently. Last night, they announced their results. Strong revenue and profit growth at 21% YoY. As expected, the focus on was their financial services portion of the business. The book was flat quarter or quarter with about 5K crores of repayment and 4.8K crores of disbursements.

The real estate book is starting to show signs of diversification with a lower wholesale residential RE portion but it is still 47% of the book.

The ROA and ROE seems to be holding up well for the business. GNPA actually fell in the quarter based on 90 dpd. It does look like payments are coming in through for Piramal as of now. I suspect there is a lot of advance payments that is going on here that is causing this to look very strong and probably some better risk management as well.

A detailed book sensitivity shows that there are probably around 10% of the deals that need attention which is not concerning given that Piramal has shown an ability to actually implement corrective action and fix them in the last few quarters.

The key news was on the liability and equity side. The company informed that they were planning to bring in 8K-10k crores of equity on what they called significant growth and consolidation opportunities that are opening up on the NBFC.

I will also link here the CNBC transcript that shows a more aggressive yet cautious contrarian waiting for the right opportunities to open up in the NBFC space. It was good to see that they are treading with caution and watching instead of jumping into the first deal they get. With a solid quarter behind them, will this be a case of yet another counter cyclical aggression from Piramal? Only time will tell.

Last night Shriram City Union Finance announced its quarterly results. Assets under management is up from 29,582 crores in March 2019 to 30,352 crores at the end of June 2019. RoA is marginally down to 3.41% in June from 3.44% in the prior quarter. RoE is down to 15.44% from 16.48% at the end of March. Disbursements are marginally down 5% QoQ. EPS was INR 38.4, Book value at INR 1005, CRAR at 22.5%. Asset quality only very marginally declined with net stage 3 assets holding almost flat at 5.03% with provisions just marginally up. Looking at the ALM statement, looks like their short term liquidity is fine.

And this was supposed to be a bad quarter. Results have help up well and the business model seems more steady than what the news will lead you to believe. It does look like this blood bath will eventually open up interesting opportunities for the patient investor.

With all the bearishness around the NBFC and the liquidity situation surrounding the industry, we are closely monitoring the status of several NBFC’s. Amongst them is Piramal. Depending on which source you read at or talk to, you have Piramal, either an overexposed real estate NBFC lender in a liquidity crunch, selling investments to fund liquidity issues OR a savvy predator hungry for more deals in the market when there is blood on the streets. Either way, when the results come out tomorrow, it will be a good indicator of what the reality looks like.

With so many stories swirling around, it is really tough to separate out the truth from the rumor. All we can say is, given the sheer number of permutations and combinations of the stories out there, it is evident that Piramal is talking to investors. But for what and as what? A distressed seller or as a bloodhound on a trail. We will have to wait and see how this plays out.

We all know that Warren Buffett and Berkshire Hathaway have been bullish on banks in America. It looks like the fest is all set to continue. Berkshire Hathaway just filed a Form 3 with the SEC as a 10% owner of Bank of America (BAC). You can find the filing here

It looks like Berkshire has added over 54 Million shares in BAC since April 2019. What is even more interesting is that Warren Buffett and Berkshire have been actively selling down Wells Fargo every quarter for the last few years to keep its ownership interest below 10% (here) as it hampers their ability to do business with the bank (here)

It also looks like it is okay to own up to 25% of a bank as long the investor gets a permission from the federal reserve and assures them that they would remain a passive investor.

Whichever way you look at it, between WFC, BAC and the growing stake a JPM, Warren Buffett is owning a huge piece of the American banking system. And his actions are the strongest indicators on how Berkshire feels about the current valuation of American banks and areas where large amounts of capital can be deployed for Berkshire.

STFC announced their results last night. It has been a very tough quarter for the NBFC’s working through the liquidity crisis that has ravaged the sector. Considering the circumstances, I had braced myself for a blood bath from Shriram Transport this quarter. While the provisions and the NPA’s are sequentially up, they are only marginally so and could have been a lot more worse considering the circumstances.

Key metrics of ROA, ROE and provisioning continue to hold up pretty okay given the tough environment. Given the nature of the clientele that Shriram Transport caters go, which is the single owner trucking industry, it is not surprising to continue to see a large stage 3 asset book but very little seem to convert into actual write-offs.

What will be interesting to hear from the management will be the liability mismatches, liquidity and repayments during the conf call. Other than that, as an investor, I just have to sit and brace for another quarter of bad headlines and watch paint dry as the fundamentals continue to hold for STFC.

Wells Fargo has been a decisive name that has divided investors. While the fundamentals continue to hold steady, negative headlines and a rock bottom valuation continues to test the patience of investors. It has been interesting to look at what Charlie and Warren have been up to with Wells Fargo during this time.

Below is a look at the Daily Journal portfolio which is essentially managed by Charlie Munger. While the Daily Journal corporation is not the primary investment vehicle for Munger, it is hard to fathom Charlie not taking his fiduciary duty very seriously at Daily Journal on managing the portfolio.

The thing that caught my eye was just how big the Wells Fargo position is. It is over one half of the portfolio at this point. It is extremely interesting because Charlie has long preached assiduity and it looks like he is practicing it hard. Not a single trade on Wells Fargo since Q4 2013 (as far back as the database at Dataroma goes).

On the other hand at Berkshire, limited by an ownership limit of 10% that would force them to convert to a bank holding company, Warren Buffett has been selling just enough to keep it inside of the 10% ownership rule. While one can speculate on what would his actions if he was not loaded up to 10%, the act of keeping it just below 10% through this tough time for Wells Fargo is an indicator of the confidence that both Warren and Berkshire have on the bank.

Charlie Munger and Warren Buffett did weigh in on the Wells Fargo Issue a couple of months ago after the annual meeting at Omaha. It basically reinforces their faith in the bank while calling out the mistakes.

Some very interesting comments came from Saber Capital recently on Wells Fargo here

While it has been extremely interesting to watch the market react to the accounts scandal and politicians drum it up for headlines, what remains behind is a company that has $1.9 trillion in assets and $1.3 trillion in deposits that is buying back its shares and eating into itself. This year, an estimated 15% of the market cap of Wells Fargo will be distributed either in the form of a dividend or buybacks. Probably, it is not such a bad thing to be limited on growth but to allow the bank to buy itself back cheap on the back of negative headlines. While the headlines have been scary, the assets and the deposits are continuing to hold steady at Wells Fargo!

While time will tell how the next chapter unfolds but as an interested and a vested investor in Wells Fargo, it is tough to ignore the headlines and just watch the fundamentals. Probably time to practice some assiduity.

While there are a lot of commentators out there commenting on Berkshire’s results, here is a short different take on it.

In 2018, Berkshire took a pre-tax mark to market losses of $22.4B on investments and derivatives and $17.8B on a post tax basis

Berkshire reinsurance group did not have a great year and lost $1.1B pre-tax driven by property casualty and retroactive reinsurance.

Berkshire’s portion of the Kraft Heinz goodwill impairment was $2.7B in 2018

$19.8B of Fixed Income securities compared to $172B of equities

$109B in Cash and treasury bills

Offset by strong earnings in the rest of the operating businesses and insurance companies resulting in a book value increase of 0.4% and net income of $4B for the year.

If on a year like this, Berkshire does not lose money, it talks a lot about the fortress balance sheet and the resiliency of the business model. I know that Buffett talks about not using BVPS any more. I look at it differently. It was an understated proxy for intrinsic value. Now, it is vastly understated for the intrinsic value.

It is often about return of capital before return on capital. There are a lot of commentary about Berkshire being an index fund. It might be but the risk profile is completely different.

Molycorp, Inc. is a rare earths producer. The Company operates in four business segments: Resources, Chemicals and Oxides, Magnetic Materials and Alloys and Rare Metals. The Resources segment includes its operations at the Mountain Pass facility. The Chemicals and Oxides segment includes the production of rare earths at Molycorp Silmet; production of separated heavy rare earth oxides and other engineered materials from its Molycorp Jiangyin facility, and production of rare earths, salts of rare earth elements (REEs), zirconium-based engineered materials and mixed rare earth/zirconium oxides from its Molycorp Zibo facility. The Magnetic Materials and Alloys segment includes the production of Neo Powders through its wholly owned manufacturing facilities. The Rare Metals segment produces, reclaims, refines and markets niche metals and their compounds.

Often companies get into bankruptcy as they are unable to absorb the burden of the debt that they have undertaken and go through the bankruptcy process and come out stronger with better negotiated debt on the other side. The market that Molycorp operates in is dominated by Chinese firms . When the economic behemoth tried to strong arm the world by controlling supplies, Molycorp and Lynas came up with supplies with some non-Chinese mines. These two companies at one point contributed to 10% of the global consumption. Since then the Chinese have backed down and the world has been more than willing to buy from them at rock bottom prices.

When one looks at the financials of Molycorp, attention needs to be paid to the income statement rather than the balance sheet as we usually do in distressed conditions.

$M

2012

2013

2014

Sales

527.7

554.4

475.6

GP

18.8

-67.2

-99.6

GP %

3.6%

-12.1%

-20.9%

The company has been reporting net negative gross margins. The company has been losing money just getting metal out of the ground. This is even before the sales force is paid, the corporate expenses are paid and even before the interest payments are serviced on the debt. The only time when the GP’s were positive was during the Chinese induced shortages which resulted in a huge price increased in the market. Just restructuring the debt with lower interests or better terms or financial engineering is not the solution to this problem.

The company has not outlined any measures that can make the investor comfortable that a margin of safety exists in the bond even under distress. Unless there is another attempt to strong arm the rare earth market from the Chinese or the US is determined to use only US made rare earth metals, or the Chinese crack down on the black market, financial engineering will only go far to stem this tide. A cautious investor will do well to sit this out and watch from the sideline!